Preparing for Your Future: Developing Your Exit Strategy

The jewelry industry is at crossroads facing many changes in our industry. One of the more compelling is the number of retail jewelry owners who are baby boomers. This group is quickly approaching retirement age. Approximately 60% of retail jewelry store owners are nearing retirement. The question is, “What are they going to do”? As a business owner, there are three options to consider. They are: selling to a third party, selling to a staff member (a manager or family member), or running a “Going Out of Business Sale”. Each of these have advantages and disadvantages. We are going to explore each, which will help you as a business owner formulate your plan.

Selling to a third party is an attractive proposition. However, there are very few buyers because of the high cost of entry and the risk involved. In 2015 approximately 700 jewelry companies closed their doors. This is a direct indicator that few companies are being purchased by outside parties. The reason is the “unknown risk”. The key person in the jewelry store is the owner, once they are gone, “What will happen?” Additionally, few stores have formal written procedures to insure consistency of execution. Prospective owners must question, “Will the national brands in the store transfer”? These factors limit the number of third party individuals or companies willing to buy your business. If you find one, they typically will not pay the amount the company is worth because they discount your business because of the unknown risk.

The next option is to sell to an employee. This person could be a relative or not. This typically is a good alternative because they understand the risk and the processes which will encourage them to spend more for your business. In other words, they see the opportunity and are willing to pay for it. However, you should proceed with caution and ask the following questions before selling to a staff member:

Do they have the skills to run a business?

Do they have the characteristics of a business owner?

Are they driven?

Do they have the ability to finance the purchase of your business?

Most staff members who are viable candidates to buy your business do not have all the skills necessary to be successful. These skills include:

Selling Skills

Customer Relations

Marketing/Promotions/Social Media

Accounting

Merchandising

Human Resources

If that is the case, then you must develop a plan for them to learn these skills. Our experience when helping companies through transition is it takes 2 to 5 years to develop these skills. As an owner/seller, you want the new owner to be successful because often they will rent the location from the previous owner.

Once you have a viable candidate, the next question is how do you value your business? Depending on your company structure, the purchase will involve some or all of the following components:

Assets, which include inventory (discounted for age), furniture, fixtures and equipment

Plus Goodwill, which is the premium for the business’ customer list, reputation, and intellectual property (name, logos, etc.)

Assets and liabilities are easy to calculate because the numbers come from the business tax return. However, Goodwill can be calculated a number of ways. At Vantage Group, we use a multiple of adjusted earnings to determine the value for Goodwill. The earnings are adjusted to give a normalized annual earnings. Unusually big sales or expenses such as owner’s travel or owner’s bonuses should be excluded. This adjusted earnings is multiplied by a factor that is determined by averaging six subjective criteria that rates the business on risk, competitive, industry, company, growth, and desirability. The typical multiple for retail jewelers is between 2 and 4 times. These factors determine the current value of your business and with time you can improve the value prior to completing the sale.

The last option, if you don’t have a buyer, is to run a “Going Out of Business” sale. This option generally produces approximately 1.2 times your store’s annual volume in a 6 week period. However, you want to hire a professional company to run the sale for you. A company who can provide additional merchandise during the sale to maximize the opportunity. Always sell your inventory aggressively in order to maximize the cash return.

As a business owner, you have three options to exiting your business. All three of these options take time to prepare to maximize the value of your business. The first step is to start a plan to achieve your goal to retire and determine which option is best for you.

Questions

Which one below is not the best option the getting out of your business?

a. Selling to an outside third party

b. Running a “Going Out of Business” sale

c. Selling to staff or family member

d. Hoping for something to happen

Which option typically gives you less money when you sell because of the unknown risk?

a. Running a “Going Out of Business” Sale

b. Selling to a staff or family member

c. Selling to an outside third party

d. None of the above

Of the components in determining the value of a business, assets, liabilities, and goodwill, which is the most subjective?